Sharing Services in the UK Public Sector

The linked Article was posted by eGov monitor Weekly in December of last year. It highlights research that has suggested that the Public Sector in the UK could save up to £40bn over the next decade by sharing services across public sector human resources and finance functions.

The BuyIT Best Practice Network has been working with the government on take-up of shared services and calculates that government finance and HR services alone cost £9bn a year more than is necessary, which it says is the equivalent of 15 new hospitals, 200 miles of motorway, 30 new secondary and 50 primary schools each year.

Shared services in the public sector is a hot topic right now. Central government has been pushing it as a way to improve services and significantly reduce costs. But how relevant is shared services to the Public Sector and how does it differ, if at all, from shared services in the Private Sector. And what exactly does "sharing of services" mean, and how is this related to the need to "collaborate"? The commentary below aims to cover this and more.

SHARED SERVICES IN THE UK PUBLIC SECTOR: IS THE CHALLENGE DIFFERENT TO THAT FACED IN THE PRIVATE SECTOR, AND WHAT DOES “COLLABORATION” MEAN VS “SHARING” OF SERVICES?

Shared services has been widely recognised for many years as being an effective way to achieve the triple benefit of lower costs, improved service levels and a tighter, more efficient, enterprise-wide control environment. However, at a recent public sector conference in London, amongst other things, the subjects of centralisation vs shared services and the need for “collaboration” between independent public bodies to benefit from “sharing” services, came up in discussion. This got me thinking about how shared services can work in and benefit the public sector.

I have personally been working with three main definitions/descriptions of shared services: an organisational definition, a statement of goals and an overview of how these goals are achieved.

(a) An organisational definition: Shared services is the organisation that provides non-core, but “mission critical”, services to the business, employing a specialist team, geographically unconstrained, and focusing on the requirements of the customer. This involves a philosophy and approach totally unlike traditional corporate-driven centralisation.

(b) The goal of shared services: To provide high quality, non-core services (which can include both repetitive common processes and more specialised professional services) to the enterprise at lower cost and more efficiently than the enterprise could otherwise provide for itself.

(c) How shared services achieves its goals: Shared services achieves cost savings, higher quality of service and a tighter control environment by leveraging economies of scale, technology, organisational realignment, labour arbitrage, best practice and end-to-end process re-engineering.

Centralisation vs Shared Services

Within the third of the definitions above is the statement that shared services achieves its goals “by leveraging economies of scale”, as well as through technology, organisational realignment, labour arbitrage, best practice and end-to-end process re-engineering. This is in large part where the “sharing” bit comes in. While this is very important, shared services in terms of the provision of best-in-class support services is much more than achieving benefits through “centralisation” alone. Remember that shared services “involves a philosophy and approach totally unlike traditional corporate-driven centralisation”. For “corporate” here in the Public Sector one could read “central government”. Also remember that shared services is about service to the customer, with these customers demanding quality service at reasonable cost and this involves effective use of a service delivery framework, supporting technology, organisational realignment, benchmarking, adoption of best practice and end-to-end process re-engineering.

So who is the customer?

Again, at the conference there was a great deal of discussion around who is a “customer” vs a “consumer” of services vs a “stakeholder”. This challenge in defining each of these is not unique to the public sector. The exact same question needs to be answered in the private sector. Ultimately, it is all about providing quality services to those who pay you and to those who then consume your services. In the public sector I guess “payment” is to some extent through the budget setting process so will be the relevant local council, government ministerial office, etc… but ultimately this is of course the taxpayer, plus there might be some local charging to customers for certain services. The “consumer” will be the users of your services which, in a Primary Health Care Trust for example, will be those needing medical and related services. Key “stakeholders” might be customers and consumers as well but will probably also be in key decision making positions.

So how does “collaboration” come into all this?

One delegate at the conference said that they were attending the event to learn how best to collaborate for shared services rather than necessarily to learn how to centralise, as they believed that they had already achieved all the benefits they could from “centralisation” within their own organisation. They wanted to know how to collaborate with others to further benefit from economies of scale associated with centralisation. I refer back to comments above on centralisation vs shared services and the fundamental differences in approach between the two but, leaving this aside for the moment, the question is a very interesting one. Furthermore, is this need for “collaboration” something unique to the public sector?

The answer is that all sharing of services involves some element of collaboration. Private sector companies have been wrestling with the need to gain support for moves to shared services within their own organisations for years. For example, sharing of services will require some extent of collaboration across different locations, entities and regions and across different employee bases, functions and business units – often each with their own unique culture, leadership styles, “ways of doing things around here”, etc. That has not stopped many companies moving forward with shared services, but the extent to which each individual case can be successful depends very much on the ability to continually move forward despite opposition and reluctance to change, and to carry people along with the change. This is why “change management” is so often cited as being absolutely critical to success in any shared services initiative. So, is the public sector unique in this regards? Absolutely not. What might be different to some extent is that there is politics between, for example, local councils with different political agendas, leaders and local constituency requirements. However, at some point and at some level they all “report up to” the same boss – councillors, central government ministers, etc, and ultimately to taxpayers and the electorate. This is really not that different in the private sector with, for example, the “electorate” being the company’s shareholders. Having said this, at the end of the day, if the leaders of these individual public sector bodies do not want to “share” anything then it is much less likely to happen, unless they are either persuaded to do so through discussion and persuasion, etc, or if they are simply instructed to do this, and then do not proceed to undermine the whole initiative. But this is also not fundamentally different to the private sector.

Another comment made at the conference was the concern around potential local unemployment resulting from sharing of services with other local government bodies. This is, of course, a very important local impact factor that could clearly have local political, social and economic ramifications. What I would say is that one major aim of shared services is to reduce costs (leaving aside the importance of improving service levels for a moment) to release funds for use for “frontline” services. The intention is to make funds available to employ frontline staff such as nurses, fire services, police, social workers, etc. Where a potential problem comes in is what was voiced as the concern that any savings would simply by taken up by government further up the tree and be lost locally. While this is, of course, a real and valid concern that must be addressed to help encourage the right decision to be made for the “greater good”, a similar scenario occurs in the private sector with the “use it or lose it” approach to spending the annual budget. In other words, there is the same potential element of distrust in the private sector as in the public sector that any savings made will not benefit those that strive to make the savings. However, in the medium to longer term it is much better, in my opinion, to be master of your own destiny (at least to some extent) than have someone else come in and say to you, for example, that you must cut your expenditure immediately by 20% and that the only way you can do this is to close schools or hospitals or other such high impact examples, This is also, of course, where leadership is critical and where clear “rules and guidelines” should be in place on how targets are set and who benefits from savings made. There may well be some “sharing” of the benefits locally and up the tree. Remember that the same question of “what’s in it for me?” needs to be answered both in the public sector and in the private sector.

One shouldn’t also forget that central government could actually help mitigate the impact of localised higher unemployment by perhaps actively encouraging some shared service operations in the public sector to locate themselves in these high unemployment areas. This is one of the advantages of shared services being “geographically unconstrained” – they can in theory be established anywhere.

The Shared Services approach within a single Public Body

It is also really important to remember that shared services brings many possibilities, tools and techniques that can be deployed, and this does not just involve centralisation nor necessarily require collaboration with others outside each individual public sector body. Within a public sector body there is still the possibility of reaping the benefits from following the shared services approach through organisational realignment (“organisation” here referring to within and across the in-scope functions themselves), process standardisation, automation using today’s technology enablers, centralisation and also through following a customer centric approach. This will involve some “sharing” across offices, regions, functions, departments, etc, even within the same public body, and will also of course require some degree of “collaboration”. The extent of required collaboration will depend on exactly the same drivers as in the private sector: senior management support, culture, individual drivers for change, existing technology platform, targets needing to be met (e.g. is there a “burning platform” demanding change such as a budget squeeze), effective change management, etc.

It is also important to highlight the fact that it is “better to eliminate than relocate”. What this means is that if a given service, process or task can be simplified or completely eliminated then it is better to do this than to simply relocate it to be carried out at a different location. Moving to a different location can result in lower cost through economies of scale being gained through centralisation or through leveraging lower cost labour (also called “labour arbitrage”) either within the UK or potentially even elsewhere, but if you can eliminate the need to do something in the first place then the cost de facto becomes £NIL.

So what about “sharing” front office (or front line) services?

When thinking about the possibilities for shared services in the public sector remember that the scope across the “back office” is very significant and includes finance and accounting, procurement, logistics, human resources, information technology, legal, facilities management and site services. This is just the same as in the private sector.

In the early days of shared services it was true that there was a much greater emphasis on “back-office” functions than on “front office” functions. However, today the potential scope has moved right up the value chain and many “customer facing” services can also be shared serviced or outsourced. Just look at customer helpdesks and call centres, research, development and engineering centres, etc. The key is to decide what can be gained from following a shared services approach, and how best to generate “value” at lowest possible cost.

In terms of the public sector and local government (and by the way it is just the same in the private sector) one needs to determine what needs to be physically close to the customer vs what can be done remotely. Then one should ask the question that if something can be performed remotely will some level of service inevitably be lost.

How about the problems of turnover of people in leadership and decision making positions as part of the political cycle?

Another comment raised at the conference was that the tenure of politicians, local councillors, etc (e.g. elected officials) can be a “short” one and the individuals concerned may not want to make potentially unpopular decisions that don’t result in benefits within their, say, four years of being in office. Again, this is a very reasonable comment, but how many CEOs do you know in the private sector who have tenure of more than four years? Of course there are examples, but I recall reading somewhere recently that the average tenure of a CEO is around just two years. The point is that, again, the same problems occur in the private sector as in the public sector. If anything, the time horizons in the private sector can be even shorter, For example, what about the quarterly reporting cycle for most publicly quoted enterprises? Sometimes organisations don’t look much beyond the next three months, even though effective strategies require execution across many quarters (“execution” being the operative word here).

Returning to the need for mutual benefit and collaboration

Returning to “collaboration” between “independent” local government bodies, clearly shared services will not readily succeed unless there is some degree of mutual collaboration. The extent of actual collaboration required will in large part depend on how decisions are made and how things get done. For example, are decisions always made by committee or are certain individuals empowered to make fast decisions to drive through change? Again, this same question has to be asked in the private sector, especially in larger conglomerates which sometimes find it very difficult to make course changing decisions.

Another concern raised at the conference was that one body might not want to hand over its “back office”, and perhaps even some of its “frontline”, services to another body, who then might receive all the local plaudits and employment that could come with this. In the “early days” of shared services the textbooks talked about a company potentially introducing an effective internal shared services operation and then selling its services to other companies, even competitors. In reality this really didn’t happen that much. There are some very successful examples of this “going external” (e.g. Genpact out of GE) but these are more the exception than the rule. What has superseded this, of course, is the significant growth in outsourcing of support services, initially in IT Outsourcing (ITO) and then more recently in Business Process Outsourcing (BPO) in areas such as finance and accounting, HR, procurement, logistics, customer care and after sales service. So what is the point here in relation to the public sector? The point is that I can understand why this “collaboration” across independent public sector entities can present challenges as well as opportunities. So, given these challenges, the options really are:

(1)Collaborate successfully through a mutual understanding of the benefits that can accrue to all parties involved in the collaboration, and move forward with shared services through whatever delivery model that is agreed upon.

(2)Do nothing in terms of collaboration between “independent” government bodies, and therefore lose the opportunity for reaping the benefits of scale and the other possible benefits from expanding the scope of shared services.

(3)Work together on some pilot opportunities and see how these things can work to prove the model. The problem with this is that the move to shared services may be slow and perhaps too slow given the challenges faced with budget shortfalls. However, this can be a route forward. For example, I understand that some local Fire Services are collaborating for shared services in pilot projects to see if this can work to the benefit of both parties, and that these are showing early signs of success.

(4)This links into the well used methodology in the private sector of looking for “quick wins” to prove the concept and gain buy in for further increases in the scope and depth of shared services. This could be, for example, in something as simple as automating a previously very manual process which speeds up payments for expenses incurred while on local government business or for benefits claimed within a local constituency. Quick wins can come in all sorts of forms which will vary from individual case to case.

(5)Have the leadership of both independent bodies (or alternatively the leaders above both bodies) “mandate” that this will happen. This still then needs a great deal of selling, change management and persuasion, but is part of the “senior management support” critical success factor that is similarly required in the private sector to give the implementation of shared services a good chance of being a success.

(6)Another possible option for “independent” public sector bodies which are perhaps reluctant to collaborate would be to look to independent outsourcers to provide some of the services. However, this does limit the options in terms of “internally” sharing services between a number of different public sector bodies.

(7)Set up a “joint venture” between a number of independent parties to implement share services. This does of course also bring its own challenges around collaboration.

The route chosen will depend on the unique motivation, drivers, circumstances, leadership and culture within each public sector body.

Closing Comments

Today there is much greater pressure on and within the public sector in general to reduce support costs and release budgets for the provision of core “frontline” services. There is also growing demand from taxpayers that their money be spent both efficiently and effectively on the services the public needs rather than on duplication, administration and back-office functions. As Sir Peter Gershon's Public Sector Efficiency Review in 2004 highlighted, the public sector should move to sharing services to help deliver significant savings and ensure that “substantial resources are released to implement front-line activities”.

The same basic challenges and significant opportunities around implementing shared services apply in the public sector as they do in the private sector, but each organisation, company, enterprise or, in this case, public sector body needs to adapt the model, timelines, approach, etc to its own unique culture, requirements and drivers. But doing nothing is really not a long term option, and the same is true in both the private and public sectors. If you don’t do something yourself, then someone else may simply come along and do it for you, and not necessarily in a way that is best for you, your key stakeholders, your customers….or your electorate.